The IIRC avoids the brickbats and launches its Integrated Reporting Framework - FutureValue
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The IIRC avoids the brickbats and launches its Integrated Reporting Framework
08/12/2013
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Last Wednesday saw the ‘soft’ launch of the IIRC’s new Integrated Reporting Framework. An audience of hundreds packed the Egyptian Room at the Mansion House for the occasion. Professor Mervyn King from South Africa, one of the architects, gave the keynote speech while other leading lights and active members of the International Integrated Reporting Council led a panel discussion. For all the billing and the august location it was a muted affair. As I left afterwards I mused on why the event had felt so subdued. I started to list the reasons on the way home and found I had more reasons than I expected to find.

First, this had been a ‘soft’ launch. Most of those present at the launch will have seen and read the Draft IR Framework and a good number will have responded in the consultation process. Many had expressed reservations, some quite strong, about the long draft IR reporting framework and the imposition it places on reporting companies. No doubt these reservations found their way into their consultation responses. So, here we were listening to a video introduction from HRH The Prince of Wales and in the presence of the new Lord Mayor of London, greeting this new voluntary reporting framework that none of us had seen in its final published form. This left me questioning whether it was a deliberate plan to hold a ‘soft’ launch before anyone had seen the final version to avoid awkward questions on what was intended to be a triumphant moment? Even the Financial Reporting Council has its reservations about the Draft IR Framework, as Executive Director MeLanie McLaren made clear in her answer to a question at the recent FRC Annual Open Meeting in September. Asked where the integrated reporting initiative fits into efforts to de-clutter Annual Reports, Ms McLaren commented: “We focus on what is the objective of annual reports and think it is to provide relevant information to investors so we have been pleased to see that the IIRC, in its consultation on the integrated reporting framework, has established that as its key objective. In its framework it had lost its way and had not held true to that objective and we have made that point in our response.” If the FRC thinks the IIRC has lost its way in its IR Framework then you can be sure many others will hold stronger adverse opinions.

Another reason for the subdued atmosphere at the Mansion House was down to simple incredulity of many who were there. The IR Framework is asking senior executive teams to rethink their businesses in a completely different way. Professor King has introduced a radical ‘six capitals’ business model that requires a fresh approach around a strategy-driven narrative core. Most UK listed companies are still unable to report strategy effectively even after twenty years of the persuasive best practice standard of the Operating and Financial Review, first introduced in 1992. Strategy reporting in the UK has this year become mandatory and the jury is out on whether even this will yet improve the quality of UK non-financial reporting. So, what chance is there for the rest of the world with the IR Framework? The IIRC’s model underlying its framework is undoubtedly radical and feels alien even to the more expert eye. So, the pathway and process to effective IR adoption are far from clear.

A third reason for the muted affair was pure and simple cynicism among the audience about the motives of those who are promoting the new IR Framework. Accountants dominate the IIRC whose funding also comes from accounting professional bodies and the major accounting firms in the main. The more complex the IR framework the more reporting companies and organisations will need the support and assistance of external professionals to introduce it. Accountants and particularly auditors have become more involved in corporate reporting. Adopting the IR Framework should provide a substantial new revenue earning opportunity for the global accounting firms. At least, that is the opinion of the cynics and there were plenty of them in the audience at the Mansion House. Many reason that, if auditors have been unable to get the majority of UK quoted companies to achieve best practice narrative reporting standards after twenty years, what hope is there with something as complex as the IR framework?

The sentiment behind the IIRC’s initiative is absolutely right. The question has to be whether the IIRC is going about the right way? There is indeed a demand for more and better non-financial reporting. Ms McLaren’s boss, Stephen Haddrill, observed at that same Annual Open Meeting about “the growing interest amongst investors to get a better forward-looking picture of where a company is going.” To achieve this needs good non-financial narrative reporting. The real issue is that the green lobby interprets the mention of ‘non-financial reporting’ as referring exclusively to sustainability matters. It doesn’t. The need for better non-financial reporting does not automatically require more than is currently reported by companies on social and environmental matters, in the UK at least. There is even market research to show that analysts in the investment community believe they have comparatively enough on sustainability issues at present from companies. It will take better reporting on other non-financial aspects – good strategy-focused narrative reporting about the business in particular – to gradually build demand for the next stage and the complexity and detail of the IR Framework.

Yet, for all the cynicism, the muted atmosphere and the subdued feeling surrounding the ‘soft’ launch, everyone there wanted and wants the the principles underlying the IR Framework to take hold. The world needs transparent reporting where companies take stock of every impact of their existence. IIRC Council Member Huguette Labelle of Transparency International asked me at the reception after the launch what it would take to make Integrated Reporting a sure-fire success. I didn’t have an answer for her. There is no simple option. Perhaps we have simply to see the IR launch in terms of that familiar Confucian saying: ‘A journey of a thousand miles begins with a single step’.